FreeTaxUSA predicts I'll owe more than expected. How do I pay in advance to avoid penalty?

[MarieIG]

I'm a little confused by the introduction of IRA withdrawals and not sure what people are talking about. Wouldn't that just mean more taxes?

It would - if you don't do the 60 day rollover. I did this the first time two years ago, and again last week. I do pay estimated taxes, but there was additional income to due the raise in interest rates and the buying of treasuries.

I withheld from Vanguard (they allow you to withhold up to 99 percent of your distribution) and made the "60 day rollover" into Fidelity, for the the 100 percent "distributed" with a check from my Fidelity cash management account - but was very careful to have this designated as a 60 day rollover. The one percent withheld subsequently showed up in my checking account, with the 99 percent of the funds distributed sailing off to the IRS and NYS.

Rollovers of retirement plan and IRA distributions | Internal Revenue Service

Find out how and when to roll over your retirement plan or IRA to another retirement plan or IRA. Review a chart of allowable rollover transactions.

www.irs.gov

 

[Dranoel]

Thanks for all the very useful information. I love this site!

 

[SecondCor521]

This may be of interest to those who are simultaneously targeting a safe harbor and getting large refunds.

There are multiple safe harbors. The one mentioned most in this thread so far is a percentage of the previous year's tax.

There are two others based on the current year's tax: paying 90% of the current year's tax or owing less than $1000 in the current year, either via withholding and/or refundable credits. Using either of these methods helps avoid both an underpayment penalty and a large refund; the main drawback is that you have to figure your current year tax bill pretty well to be able to use them.

 

[audreyh1]

This may be of interest to those who are simultaneously targeting a safe harbor and getting large refunds.

There are multiple safe harbors. The one mentioned most in this thread so far is a percentage of the previous year's tax.

There are two others based on the current year's tax: paying 90% of the current year's tax or owing less than $1000 in the current year, either via withholding and/or refundable credits. Using either of these methods helps avoid both an underpayment penalty and a large refund; the main drawback is that you have to figure your current year tax bill pretty well to be able to use them.

I do more work before paying the Q4 estimated taxes on Jan 15. If it looks like taxes are going to be less than the prior year’s taxes, I make sure to get close to 90% of current year’s taxes rounded up slightly. I try not to overpay.

One year I had overpaid by Q3. That was because even though our taxable income was higher that year, we made a sizable charitable donation later that year and it dropped our taxes a lot. So paid nothing for Q4 and applied the refund to the next year’s taxes.

 

[Amethyst]

OK, I spoke to Vanguard. The rep was aware of the process that dear Jerry1 outlined. He cautioned me that it can only be done once every 365 days, and asked if I had made any IRA withdrawals in the past 365 days. I guess I will have to be wary when I start taking RMDs.

1. I took money from my T-IRA and had 99% withheld for the IRS.
2. In about 2 weeks, I intend to "roll over" money from a taxable account, back into the IRA. I plan to do it on the phone with Vanguard so they can confirm it is a Form 5498 Rollover, and not a contribution (which I cannot legally make, lacking earned income).
3. In 2025, I will have 110% of 2024's tax withheld from my pension throughout the year to create a "safe harbor."

Thanks, everyone!

Amethyst

 

[audreyh1]

You can’t rollover your RMD anyway.

There is no time constraint on IRA withdrawals. Only on how frequently you can “undo” a withdrawal by turning it into a rollover.

 

[SecondCor521]

I plan to do it on the phone with Vanguard so they can confirm it is a Form 5498 Rollover, and not a contribution (which I cannot legally make, lacking earned income).

Good idea to make the phone call.

I would suggest just calling it a rollover, not a "Form 5498" rollover. Form 5498 is used to reflect both contributions and rollovers, so adding that modifier is probably more likely to confuse the rep than it is to clarify. It's also a phrase I had never read until now so I don't think it's a commonly used phrase.

(You could say a "box 2 rollover" and contrast that with a "box 1 contribution", because I'm pretty sure that's where the two types of transactions are reflected on Form 5498.)

If Vanguard somehow misunderstands, it's a hassle but fixable. Just call them if they report it wrong on your tax forms and they should be able to fix and reissue. They can always go back and listen to the original recorded conversation.

 

[Koolau]

This is what you do. (summarizing what some others have said)

Let's say last year's tax was $10,000. Assuming you were over $150,000, you need a safe harbor amount of $11,000. You said you pay in extra but not the full 10% extra. Let's assume you'll have $10,500 paid in by the end of the year. You need $500 more to meet safe harbor. Paying it in through estimated payments will not avoid penalty because you're paying it in late. Solution:

Make a withdrawal from your IRA and have the amount 100% withheld. Then, wait a week and transfer that same amount back into your IRA from your after tax/brokerage account. On paper, what you've done is taken a distribution and then put the money back in so there is not tax impact. What you've accomplished is you got $500 withheld and sent to the IRS. That $500 will be considered withholding and considered to have been paid throughout the year which will overcome the problem you'd have if you just send in a check.

It's way easier than you think. I'm sure your IRA administrator will know exactly how to do this. It works like a charm.

How elegant! Thanks for the strategy.

 

[Healthy Lifestyle]

It is a way to avoid penalties for under-withholding or not paying sufficient quarterly estimated taxes. And, yes, it is a taxable event in and of itself, but, for most people, you need to get money out of your tIRA before RMDs kick in anyway, and avoiding an underpayment penalty improves the return on making that withdrawal now.

This is my first Roth conversion. I think Gumby has the right idea in my case, since I am sitting with a large tIRA and ~5 years to RMDs.

 

[rayvt]

Good idea to make the phone call.

I would suggest just calling it a rollover, not a "Form 5498" rollove

You don't have to call the broker. They don't need to do anything special. When you file your taxes, you just code the amount as a 60-day rollover.
Turbo Tax asks "What did you do with the money?" You check the box that says "Rolled all or part of it over".

I regularly take a withdrawal from one IRA account at one broker and roll it over to a different IRA account at a different broker.

 

[Steelart99]

I have a somewhat related issue with not paying enough taxes this year. I did not pay any taxes this year since I have a fairly low income level and typically just pay it all at the end of the year if anything is due. I actually got a total tax refund last year after paying quarterly taxes in 2023 based on the previous year's uncommonly high income (inheritance).

That said, this year I opted to liquidate some stock in mid-October (Q4) to try to take advantage of the 0% Capital Gains tax bracket which is under $94,050 of taxable income - married filing jointly. However this also boosted my AGI such that I have about $8K of taxes due now. The taxes are due to having to pay back ACA reduced premiums as my income rose.

So ... based on the Safe Harbor rules, I will have paid 100% of the taxes due for the previous year ... $0. Does that mean that I meet the requirements for Safe Harbor, i.e., no penalty? I assume I should pay my total estimated taxes before the end of the year. Right?

 

[TheWizard]

I have a somewhat related issue with not paying enough taxes this year. I did not pay any taxes this year since I have a fairly low income level and typically just pay it all at the end of the year if anything is due. I actually got a total tax refund last year after paying quarterly taxes in 2023 based on the previous year's uncommonly high income (inheritance)...

That's a bit puzzling since there's no Federal inheritance tax.
But six states presently have one, so I guess you're in one of those...

 

[cathy63]

You don't have to call the broker. They don't need to do anything special. When you file your taxes, you just code the amount as a 60-day rollover.
Turbo Tax asks "What did you do with the money?" You check the box that says "Rolled all or part of it over".

I regularly take a withdrawal from one IRA account at one broker and roll it over to a different IRA account at a different broker.

It's not just about what you put on your tax return.

You have to tell the receiving brokerage it's a rollover when you deposit it, because they can't take a deposit larger than the maximum allowed contribution unless they know for sure it's a 60-day rollover. Even if it's less than the max, they can't assume it's a contribution instead of a rollover because you might not have earned income and they have to produce an accurate 5498 for the IRS.

You must be filling out a deposit form that has a box that specifies how they should treat the funds you are sending them.

 

[cathy63]

So ... based on the Safe Harbor rules, I will have paid 100% of the taxes due for the previous year ... $0. Does that mean that I meet the requirements for Safe Harbor, i.e., no penalty? I assume I should pay my total estimated taxes before the end of the year. Right?

You are not required to pay estimated taxes if the prior year's tax obligation was $0, so you should not be assessed a penalty when you file your 2024 return.

 

[SecondCor521]

I have a somewhat related issue with not paying enough taxes this year. I did not pay any taxes this year since I have a fairly low income level and typically just pay it all at the end of the year if anything is due. I actually got a total tax refund last year after paying quarterly taxes in 2023 based on the previous year's uncommonly high income (inheritance).

That said, this year I opted to liquidate some stock in mid-October (Q4) to try to take advantage of the 0% Capital Gains tax bracket which is under $94,050 of taxable income - married filing jointly. However this also boosted my AGI such that I have about $8K of taxes due now. The taxes are due to having to pay back ACA reduced premiums as my income rose.

So ... based on the Safe Harbor rules, I will have paid 100% of the taxes due for the previous year ... $0. Does that mean that I meet the requirements for Safe Harbor, i.e., no penalty? I assume I should pay my total estimated taxes before the end of the year. Right?

(Emphasis added twice.)

I agree with @cathy63's reply above.

I did want to point out something though - the safe harbor is based on the prior year (2023) line 24 (*), not the amount you actually paid to or received from the IRS. Since you mentioned that you paid estimated taxes and got a refund, it's possible to mistake "getting a total tax refund last year" with "taxes due for the previous year".

For example, if you paid $6K in quarterly estimated throughout 2023 and got a $2K refund, then line 24 - total tax due - could be $4K, which would be your 100% safe harbor target. In other words, getting a refund doesn't always equate to not owing income tax.

Your 4Q estimated tax deadline is 1/15/2025, not 12/31/2024. If you meet a safe harbor, you don't need to make the 4Q payment and can just pay it by April 15, 2025.

You might need to complete Form 2210 Schedule AI to prove you don't owe an underpayment penalty.

(*) There are more niggly details, but check out the IRS instructions for Form 1040 Line 38 for those.

 

[audreyh1]

I have a somewhat related issue with not paying enough taxes this year. I did not pay any taxes this year since I have a fairly low income level and typically just pay it all at the end of the year if anything is due. I actually got a total tax refund last year after paying quarterly taxes in 2023 based on the previous year's uncommonly high income (inheritance).

That said, this year I opted to liquidate some stock in mid-October (Q4) to try to take advantage of the 0% Capital Gains tax bracket which is under $94,050 of taxable income - married filing jointly. However this also boosted my AGI such that I have about $8K of taxes due now. The taxes are due to having to pay back ACA reduced premiums as my income rose.

So ... based on the Safe Harbor rules, I will have paid 100% of the taxes due for the previous year ... $0. Does that mean that I meet the requirements for Safe Harbor, i.e., no penalty? I assume I should pay my total estimated taxes before the end of the year. Right?

Did you really pay/owe in total $0 taxes in 2023? Then you are safe. But that doesn’t sound right based on your description. Safe harbor has nothing to do with whether or not you got a refund.

Otherwise, if you fill out form 2210 when you file your 1040, you can show that you income came in the 4th quarter and that may reduce or eliminate any penalty. But you need to figure out what you owe and pay 90% by Jan 15, or meet prior year safe harbor.

 

[Steelart99]

My 2023 1040 line 24 was $0 and I got a tax refund of $22K after making quarterly estimated tax payments ... that were based on the previous years income. High income in 2022 due to inheritance.

 

[audreyh1]

Sounds like you are golden!

You won’t owe any payment until 4/15/25.

 

[Steelart99]

That's a bit puzzling since there's no Federal inheritance tax.
But six states presently have one, so I guess you're in one of those...

That's only true up to a certain amount. After that, inheritance income is taxable

 

[Steelart99]

Otherwise, if you fill out form 2210 when you file your 1040, you can show that you income came in the 4th quarter and that may reduce or eliminate any penalty. But you need to figure out what you owe and pay 90% by Jan 15, or meet prior year safe harbor.

That was the way I was interpreting it; that the income came in the 4th quarter and therefore there should be no penalty. I have to admit that I was having a hard time meshing the various requirements in my brain.

 

[Steelart99]

(Emphasis added twice.)

I agree with @cathy63's reply above.

I did want to point out something though - the safe harbor is based on the prior year (2023) line 24 (*), not the amount you actually paid to or received from the IRS. Since you mentioned that you paid estimated taxes and got a refund, it's possible to mistake "getting a total tax refund last year" with "taxes due for the previous year".

For example, if you paid $6K in quarterly estimated throughout 2023 and got a $2K refund, then line 24 - total tax due - could be $4K, which would be your 100% safe harbor target. In other words, getting a refund doesn't always equate to not owing income tax.

Your 4Q estimated tax deadline is 1/15/2025, not 12/31/2024. If you meet a safe harbor, you don't need to make the 4Q payment and can just pay it by April 15, 2025.

You might need to complete Form 2210 Schedule AI to prove you don't owe an underpayment penalty.

(*) There are more niggly details, but check out the IRS instructions for Form 1040 Line 38 for those.

My verbiage is a bit messy in my original post. Chronologically, I had high income in 2022 due to an inheritance and paid income tax for that year. In 2023, my income dropped down to our usually low level, but I had to pay quarterly estimated taxes base on the 2022 income; totaling about $22K. When we filed our taxes for 2023, Form 1040 - line 24 was $0 tax due. We got our entire quarterly tax payments back.

I didn't quite put it together that I "might" not have to pay a 2024 4Q tax. I'd prefer waiting until April 15, 2025. Thanks

I just got my copy of 2024 Turbotax, so I guess I need to start filling it in and running the assessment of form 2210 Sch AI

 

[audreyh1]

I don’t think you need to even run form 2210 since the 2023 tax you owed was $0.

 

[SecondCor521]

My verbiage is a bit messy in my original post. Chronologically, I had high income in 2022 due to an inheritance and paid income tax for that year. In 2023, my income dropped down to our usually low level, but I had to pay quarterly estimated taxes base on the 2022 income; totaling about $22K.

As an aside, you actually didn't need to pay quarterly estimated taxes in 2023; whomever advised you to do so was mistaken (and badly so; lending that $22K to the IRS for months on end isn't great). There is another safe harbor that would have applied (paying 90% of your 2023 taxes due, essentially, which would have been $0).

When we filed our taxes for 2023, Form 1040 - line 24 was $0 tax due. We got our entire quarterly tax payments back.

Understood.

Then you meet the 100%/110% safe harbor for 2024, assuming you were a US citizen or resident for all of 2023. Doublecheck my work by looking at the Exception to the underpayment penalty in the instructions for Form 1040 Line 38 on page 62 at https://www.irs.gov/pub/irs-pdf/i1040gi.pdf. Since those are currently the 2023 instructions, you'll need to mentally add a year wherever it refers to "2022" or "2023", and the line numbers might have shifted slightly.

I didn't quite put it together that I "might" not have to pay a 2024 4Q tax. I'd prefer waiting until April 15, 2025. Thanks

I just got my copy of 2024 Turbotax, so I guess I need to start filling it in and running the assessment of form 2210 Sch AI

If you meet the safe harbor, no need to do Form 2210 Schedule AI. That's only for situations where an underpayment penalty might be owed. (I agree with audreyh1 above.)

 

[cathy63]

As an aside, you actually didn't need to pay quarterly estimated taxes in 2023; whomever advised you to do so was mistaken (and badly so; lending that $22K to the IRS for months on end isn't great). There is another safe harbor that would have applied (paying 90% of your 2023 taxes due, essentially, which would have been $0).

Then you meet the 100%/110% safe harbor for 2024, assuming you were a US citizen or resident for all of 2023. Doublecheck my work by looking at the Exception to the underpayment penalty in the instructions for Form 1040 Line 38 on page 62 at https://www.irs.gov/pub/irs-pdf/i1040gi.pdf. Since those are currently the 2023 instructions, you'll need to mentally add a year wherever it refers to "2022" or "2023", and the line numbers might have shifted slightly.

It's even easier than that.

From the 1040-ES instructions: "You don’t have to pay estimated tax for 2024 if you were a U.S. citizen or resident alien for all of 2023 and you had no tax liability for the full 12-month 2023 tax year. You had no tax liability for 2023 if your total tax was zero or you didn’t have to file an income tax return."

 

[Steelart99]

To the OP, I do apologize for the hijack

I thank all of you for helping me to wrap my brain around this ... and pointing me to the appropriate sections or our "easy" tax laws ...